Abstract
In this paper, I investigate whether enhanced visibility by
allowing foreign participation in the domestic capital market
improves the supply, demand and overall information in the market.
Using the Shanghai Hong Kong Stock Connect (where foreign investors
are allowed to trade in stocks listed in the Shanghai Stock
Exchange through Hong Kong) as a natural experiment, the author
documents an improved supply (lower earnings aggressiveness),
higher demand (greater analyst forecast accuracy), greater
incentives for managers to meet or beat market expectations, and an
overall improvement in the information environment for the
connected firms. The results contribute to the current literature
by (1) circumnavigating the endogeneity issues of whether foreign
investments lead to higher firm-specific information, or higher
firm-specific information leads to greater foreign investments; and
(2) when enforcement of securities law is weak and costly to
implement, whether improving domestic firms' visibility by allowing
them to be traded in a developed capital market increases corporate
transparency and the information environment of the domestic
capital market. The findings should be of interest to policymakers
as the results suggest that when enforcement is costly, greater
transparency may be achieved by allowing foreign participation in
the domestic market.
Table of Contents
1 Introduction 4
2 Institutional Background 8
3 Literature Review and Hypothesis Development 12
3.1 Visibility and Earnings Aggressiveness . . . . . . . . . .
. . . . . . . . . . . . . . 12
3.2 Visibility and Analyst and Manager behavior . . . . . . .
. . . . . . . . . . . . . 14
3.3 Visibility and Stock price synchronicity . . . . . . . . .
. . . . . . . . . . . . . . 15
4 Research Design 17
4.1 Earnings Aggressiveness . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 17
4.2 Manager and Analyst behavior . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 19
4.3 Stock price synchronicity . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 21
5 Data and Empirical Results 23
5.1 Sample Selection . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 23
5.2 Descriptive Statistics . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 24
5.3 Propensity score matching . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . 26
5.4 Empirical Results . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . 26
5.4.1 Earnings Aggressiveness . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 26
5.4.2 Analyst Behavior . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . 28
5.4.3 Manager Behavior . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . 29
5.4.4 Stock price synchronicity . . . . . . . . . . . . . . .
. . . . . . . . . . . . 30
6 Conclusion 32
7 References 34
List of Tables
1 The number of firms participating in Shanghai - Hong Kong
Stock Connect . . . 38
2 Descriptive Statistics as of 31st December 2012 (in $
millions) . . . . . . . . . . . 39
3 Propensity Score Matched Sample . . . . . . . . . . . . . .
. . . . . . . . . . . . 40
2
4 The effect of Shanghai Hong Kong Stock Connect on Earnings
Aggressiveness . . 41
5 The effect of Shanghai Hong Kong Stock Connect on Analyst
Forecast Accuracy 42
6 The Effect of Shanghai Hong Kong Stock Connect on Firms'
Incentives to Manage
Market Expectations . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . 43
7 Effect of Shanghai Hong Kong Stock Connect on Stock Price
Synchronicity . . . 44
About this Master's Thesis
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